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Public sector cutbacks: Which IT contracts are at risk?

As the UK government looks for ways to cut public spending, Tola Sargeant, research director of TechMarketView examines which major software and IT services (SITS) contracts are at highest risk of cancellation, curtailment or 'de-scoping'. Which suppliers are likely to be most affected as the axe falls and what can they do to minimise the risk?

£8bn of contracts at 'high risk'

Our analysis of the largest UK public sector SITS contracts identified contracts worth over £26billion in total to external suppliers. Of these contracts, we believe existing deals with a total value of more than £8bn are at 'high risk' of cancellation or curtailment as the government looks for ways to cut public spending. A further £13.9bn worth of contracts are at 'medium risk' of similar cuts. The suppliers with the highest total value of contracts at high or medium risk of cancellation, curtailment or 'de-scoping' are HP, CSC, BT, Fujitsu and IBM.

A complex issue

The Labour government is considering which projects could be sacrificed to cut costs. But, as you might expect, the risk of IT programmes being cancelled or curtailed is significantly higher if there is a change of government at the next election, due by June 2010.

However, deciding which contracts can realistically be cut is not straightforward. Even the high profile programmes identified as 'easy wins' by the Conservatives and Liberal Democrats – ID cards and NPfIT for example – would in practice be difficult to scrap in their entirety. Moreover, the cost of cancelling the contracts and compensating suppliers could well outweigh the benefits. This is particularly true when, as is the case with NPfIT, those suppliers claim to be on the brink of delivering working systems. In the case of NPfIT, cancelling the project would force NHS Trusts to procure the much needed systems locally, quite possibly for a higher total price than the national deals.

What follows is a closer look at some of the contracts most often touted as likely candidates for cancellation.

The National Identity Scheme (ID Cards)

Gordon Brown's government has already announced plans to make ID cards voluntary, rather than compulsory, at least for the next Parliament. The Conservatives and Liberal Democrats promise to go further and scrap the ID card programme entirely. However, scrapping ID cards altogether does not equate to saving the total cost of the NIS contracts, currently estimated at just over £1bn. Two of the contracts – CSC's Application & Enrolment System (worth £385m) and IBM's UK Border Agency Fingerprint System (worth £265m) – are required for biometric passports regardless of the fate of ID cards. The main savings would come from the card design and production contracts, originally estimated to be worth about £350m, for which Fujitsu, Thales UK and IBM are shortlisted. Making ID cards voluntary could halve the cost of those deals while scrapping them all together could save the whole amount.

National Programme for IT in the NHS (NPfIT)

As with ID cards, it is important not to tar all elements of NPfIT with the same brush. The programme, worth some £12bn in total including internal spend, comprises a number of different contracts. Some, for example Atos' £64.5m 'Choose & Book' contract, have already delivered working systems (more or less) and are now in use by the NHS and being supported by the supplier. It is unlikely to be worth cancelling these contracts. BT's £1bn central database, known as the 'data spine', is also up and running. Scrapping the data spine would be very difficult logistically because so many other NHS IT systems already rely on it to share data. In reality, we believe the only NPfIT contracts which could potentially be cancelled are the two remaining Local Service Provider (LSP) deals: CSC's £3.3bn worth of contracts to provide electronic patient record (EPR) systems to the North, Midlands and East of England, and BT's equivalent £1bn deal in London.

But even then it is far from clear that the NHS would save money in the long run. For starters, BT and CSC would likely demand high levels of compensation on the cancellation of the contracts. Indeed, it is interesting to note that BT has a clause in its £546m 'Live 8' contract for the support of Cerner trusts in the South of England that entitles it to compensation of £44m should the NHS fail to deliver four 'greenfield' sites ready to take Cerner. How much more would they—and fellow local service provider (LSP) CSC—claim if the main LSP contract was completely cancelled?

Moreover, having cancelled the LSP contracts, many NHS Trusts would still need to purchase EPR systems to replace their ageing existing systems. Any supplier tendering for these deals will have watched BT, CSC and former LSPs Accenture and Fujitsu struggle to deliver and demand a very 'fair' price for the work. Even with nationally agreed frameworks for purchasing such systems, the total cost could well exceed the keen deals that former NHS IT chief Richard Granger originally negotiated with the LSPs back in 2003.

Where will the axe fall?

Our analysis reveals which major UK public sector SITS contracts we believe are at highest risk of cancellation, curtailment or 'de-scoping' as the government looks for ways to reduce spending. In analysing whether a contract was at high, medium or low risk we considered a variety of factors including: whether it has already attracted attention from cost cutters and politicians of one or more parties; the logistics and feasibility of cancelling the contract; the amount that could be saved by cancelling the contract and whether or not there are other reasons that it might be desirable to cancel the contract (e.g. poor delivery or cost overrun).

Not surprisingly, it is the biggest IT development projects that are at highest risk: the children's database ContactPoint, elements of the £12b National Programme for IT in the NHS (NPfIT), the ID card design and production contracts, the Interception Modernisation Programme and HOLMES 2020, for example. Cancelling one or two or these high profile, and often controversial, deals would quickly result in higher savings than scrapping tens of smaller contracts.

At the other end of the spectrum, business process outsourcing contracts are safest and indeed set for continued growth since they fit with the government's agenda of reducing back office costs and sharing services. IT outsourcing and desktop services deals are also relatively safe, although they are unlikely to escape the 'more for less' mantra come renewal time.

Extract from an October 2009 AnalystViews note for TechMarketView subscribers, authored by the firm's research director Tola Sargeant.